Apple’s next challenge: finding a catalyst

Analysts say new products could reignite the battered stock

DanGallagher

SAN FRANCISCO (MarketWatch) — As Apple Inc. faced its latest harsh selloff Thursday, analysts turned their focus to new products that might revive interest in the heavily battered stock.

Reuters

Analysts believe Apple needs a lower-end iPhone — cheaper than the 5 and 4S models — to address new markets.

Those products exist only in rumor and speculation at this point, as Apple
AAPL, -0.45%
is famously tight-lipped about plans for upcoming devices. CEO Tim Cook said on a conference call Wednesday that the company’s planned pipeline is “chock full” for the year, but he gave no further detail.

Expectations are mixed for new Apple products this year. The company essentially redesigned its entire lineup in late 2012, with the iPhone, iPad, iPod and even iMac getting significant refreshes. That suggests this year may see more modest updates, with existing designs getting better chips and software without major physical overhauls.

That said, expectations are growing for a new iPhone that could appeal to low-end customers in developing markets. Also, rumors still abound about Apple’s launching its own TV set at some point this year. And some believe the company needs to address the market for larger smartphone screens that has been dominated by Android-powered devices like the Samsung Galaxy.

“This spring, Apple should be readying a bevy of new products and services — and when the builds for these products become known, shares may act a lot better,” wrote Ben Reitzes of Barclays in a note to clients Thursday.

Reitzes maintained an outperform rating on the stock but slashed his price target by 22% to $575. He wrote that while the recent selloff “has tested our patience, we will evaluate Apple from here based on whether these products and services create the kind of excitement we are used to.”

The most commonly held expectation is that Apple will launch a low-end iPhone appealing to more price-conscious customers. The iPhone 4 — currently available for free with a two-year contract in the U.S. — is still a big seller but is believed to be still too pricey as far as its build cost is concerned, given its aluminum-and-glass body and high-definition screen.

Brian Marshall of ISI Group wrote that a low-priced iPhone “is paramount to financial re-acceleration” for Apple. He cut his price target by 15% to $600 but still rates the stock as a buy. He believes Apple could roughly double its penetration rate of the lower-end market with such a device, he said.

“We believe the end result would be price elasticity kicking in and driving a new phase of revenue/earnings re-acceleration, and Apple shares would likely get their ‘mojo’ back,” he wrote.

Tavis McCourt of Raymond James cut his price target to $600 from $690. He said that while his current forecast “assumes no Apple TV, no new iPhone models, and no early launch of 5S, it is a possibility that all three may happen this year.” He rates the stock outperform.

“Management’s reaction to the slowing growth, and how it addresses new markets (balancing growth vs. cannibalization) will determine if in retrospect Apple proves to be a ‘value trap,’ or in a slowing period before a re-acceleration catalyzed by new market entry,” he wrote.

Increased competition from larger-screen smartphones cost the company at least one supporter Thursday, when Peter Misek of Jefferies & Co. downgraded the shares to hold, citing in part his belief that “Apple is losing the screen-size wars,” with demand “moving away” from the iPhone and toward larger screens in the neighborhood of 5 inches.

More rumors have surfaced of late that Apple may be looking at a larger-screen iPhone, possibly in the so-called phablet category — a name given to devices whose sizes fall between those of phones and tablets. Apple made the iPhone 5 screen larger then its predecessors without increasing the width, though many of the popular Android smartphones are notably larger.

Asked about this distinction on Wednesday’s call, Cook defended the design of the iPhone 5, adding that “we put a lot of thinking into screen size and believe we’ve picked the right one.”

In his own note to clients, Stuart Jeffrey of Nomura said that while the expected iOS7 update in June or a launch with China Mobile could help the stock, the impact of either is far from certain.

“This leaves only a $300 iPhone or a premium iPhone as likely catalysts,” he wrote, cutting his price target to $490 from $530 and maintaining his neutral call. Unfortunately, he added, the former is likely to dilute average selling price and margin, while Cook’s comments “undermined our confidence in the latter being launched.”

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